Q3 2021 New Fortress Energy Inc Earnings Call
Okay.
Yeah.
Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Yeah.
Good day, and thank you for standing by and welcome to the New fortress Energy third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised.
Today's conference is being recorded to ask a question. During this session you will need to press star one on your telephone.
You require any further assistance please press star zero.
I'd now like to hand, the conference over to your Speaker today, Josh Jayne with Investor Relations. Please go ahead.
Thank you.
I'd like to welcome you to the new fortress Energy third quarter 2021 earnings call. Joining me here today are Wes Edens, our CEO and chairman of the Board, Chris Giunta, Our Chief Financial Officer, and Andrew D D managing director, leading our Brazil efforts throughout the call today, we were going to reference the earnings supplement that was posted to the new fortress energy website.
If you've not already done so I'd suggest that you download. It now in addition, we'll be discussing some non-GAAP financial measures during the call today. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.
Before I turn the call over to Wes I would like to point out that certain statements made today will be forward looking statements, including regarding future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and Investor presentation regarding non-GAAP financial measures and forward looking statement.
And review the risk factors contained in our quarterly report filed with the SEC now I would like to turn the call over to Wes great. Thanks, Josh and welcome everyone as as usual please refer to the earnings deck that we sent out to you. That's what we're going to walk through here in just the next few minutes. So.
With that let's just turn to the beginnings of a page for excellent excellent quarter.
Not only do we hit.
The margins that we had laid out for you just a month ago, but we've increased those those are forecast by roughly 50% since the beginning of the year. We did this not by being long the market by bank by making some directional bet, but rather what we did this by utilizing our portfolio of assets and terminals.
Around the world is combined with their supply to put ourselves in a great position to take advantage of the market opportunities by the numbers for the quarter $210 million in margin are in.
In July when we gave an update as to what we thought expectations should be for the rest of the year. We were at $171 million. It's obviously a significant beat to that in.
In the fourth quarter, our estimate now is $375 million so right on top of where we thought we were a few weeks ago, 98% of the revenues are booked for the quarter. So that's obviously something which we feel is pretty well baked at this point that was $184 million. This summer so in total and up a lot.
And earnings from Middle of the year through the second half of the year and estimates that two out of $219 million $585 million and total operating margin for the second half of the year annualized obviously, well over $1 billion puts us on a very very good track to achieve our goals for next year and the years. After so $1 1 billion.
2020 to a $1 $5 billion in 2023, so very very good by the numbers.
Next page.
The three drivers of the business are really the terminals business the vast LNG in our energy transition and the terminal side of the business you know the focus for US now is very much on finishing our existing pipeline.
Adding new terminals very selectively around the world and then really generating significant organic growth without the introduction of a lot more capital. So this over time this will reduce the capex spend across the portfolio on the terminal side substantially in access of these high margin.
High volume markets like Brazil, Ireland, Sri Lanka gives us.
A tremendous amount of capacity to distribute our products for the gas or power or both and doing so in a very very capital efficient way.
First LNG, there's a lot to talk about there and obviously with what's happened in the marketplace there should be.
And we think there is a lot of focus on it.
You know the decision to go F. D. On the first of the liquefy ours back earlier in the year in hindsight it looks like a very very good one.
We have the only uncommitted liquefy a scale, although it will be completed next year. So in a marketplace that is short and I'll walk through our views of it but likely to stay short for some time, we are the only people that can actually supply that with one and possibly with too.
So the opportunity to add to that whether it's for a customer and providing tolling revenues for us or was it whether it's for our own portfolio on the merchant side or quite possibly both puts us in a very very good place.
Lastly, with respect to energy transition, we've had a lot of a lot of Oh productive work done on that behalf. We are near F idea on our first facility, which we believe could be as soon as the next couple of weeks, we were talking to about blue hydrogen with cart with carbon capture.
Which we think is the death.
Definitely the path of transition fuels generally.
Viable economically at roughly a dollar a kilogram so very much the.
The sweet spot in terms of that very well positioned to benefit from upcoming legislative.
Actions, which we think will promote incentivize hydrogen production, so very very good quarter for us across the board.
A question of course, there's a lot of people have is what's what in the world what's happened to the market. So let's look at page seven.
Seven and eight nine I'll give you our thoughts about it.
The chart on the left hand side.
Tells a very compelling story.
Stomach underinvestment in the oil and gas industry has resulted in a decrease in terms of the availability of hydrocarbons and leaves us very vulnerable to shocks at a different level. So from 2014 to 2021, you have gone from roughly $800 billion in capital invested in the production of oil and gas.
Gas to $400 billion today the chart on the right hand side, you can see that you've gone from 95% of the capital being allocated to conventional gas and the oil exploration to roughly 50 50 today. So remarkable changes in a very very short period of time and ones that we are very much on board with in terms of focusing on.
Greener cleaner carbon free future. The problem is you still need hydrocarbons today and you look at page eight you can see what happens so basically.
This systemic underinvestment has led us to be.
As a market very vulnerable to shocks and.
No.
Lack of rainfall in Brazil.
Causing a decline in the hydro.
The hydroelectric power generation too much rain in China that caused them to not be able to mine enough coal lack of wind in Europe, lower Russian supply faster economic recovery all of these things kind of happening at the same time had a profound impact on the market.
This 100 year events that youre seeing in terms of the pricing of this it's one that I think we could well see on an annual basis, because you're just really we really done is lowered the amount of surplus do you have any of these shocks or any combination of these shocks together lead you very vulnerable to much higher prices.
If you look on page number nine what does that mean for our markets. We believe that the demand for LNG is expected to materially.
Outpace the supply, but theres, a significant amount of LNG production, which comes on in the second half of this decade, but there's a whole host of different uses for it I I Chronicle, a handful of them on the right hand side that could really greatly outpace even the supply so coal to gas conversions oil to gas conversions.
<unk> <unk>.
Increases in the number of electric vehicles crypto currency right the actual bitcoin production that.
<unk> is using a significant amount of energy hydrogen production ship Bunkering. There's a list of you know literally dozens of different uses of the product and there are only a handful of different sources of it. So we think this puts us in a position where you could see.
Market shocks on the system.
As we're seeing right now and on top of that fundamental shocks as you have just absolute needs for energy production and a lack of capacity for it.
So.
With that let's talk about the terminals turnover to enter and be alright. Thanks, Wes So two pages on Brazil here.
And we want to do is provide a quick macro update on the energy shortage in Brazil, and then talk about how that is leading to new business opportunities for NFC. So looking at page 11, I wanted to provide a continued update on what we've been tracking in terms of energy shortage. So on the left side kind of as we've been showing with low hydro resource in low <unk>.
<unk> levels in Brazil, So of course, leading to load generation numbers for the hydro capacity. So Brazil has about 65% of its installed capacity is hydro and then the last months.
Those hydrogen had been providing only about 20% of the actual power supply. So since August 2020 in Brazil is actually experiencing the worst hydrological period and the last 100 years and we're seeing that play out in the actual generation data here on the left side.
On the right what we're showing is that the compensation mechanism for this is almost entirely new LNG supply.
So Brazil historically has imported about three to 4 million gallons a day.
If you look kind of the 2018 2019 numbers, but in the last few months.
Brazil has been importing 19 million gallons a day in September 18 million gallons a day in October and.
And on track for obviously, a record year in terms of of LNG supply and in terms of thermal power generation.
One of the things we find interesting about the graph on the right, which is we break down the historical supply balance also for domestic gas and for Bolivian gas imports, which you can see over the last five years of both either been static or declining and so not only is kind of new thermal power. The avenue of growth for LNG demand into Brazil, but you don't have.
Growth in other sort of energy sources, and natural gas sources and so while we're seeing this increase obviously in thermal generation driven by LNG. We expect to also see other energy shortages to be answered by LNG in Brazil, as well and the data here supporting that.
If we flip to page 12, we see how this current current shortage is leading to new business opportunities for our terminals. So we're focusing here on the Santa Catarina terminal what you see in the map on the left.
In September Brazil, announce a new emergency power auction, which was run on October 25th.
Worded ppas to one two gigawatts of new power, which will come online starting in May of 2022, So a pretty quick turnaround.
We're very happy to be working with these developers we expect over 900000 gallons a day of new supply to support over 400 new megawatts.
The average power price declared was about 15 cents per kilowatt hour and the demand profile for these plants is almost 100% firm over the 44 months. So may 2022 to end of 2025.
This is obviously an outcome of the crisis that we've seen the auction respond to this by being focused on the south and southeast regions of the country, which had been hardest hit by by two things really the shortage in hydro a resource in the lowest reservoir levels as well as kind of new.
Power plant formation over the last few years in Brazil, which has been concentrated on renewables and new thermal generation in the northeast and Joe.
This reduction is really a direct response to the situation we've been seeing and I think our terminal is very well situated to outside of some very limited domestic gas.
Our LNG terminal is really the main source of supply for fuel to these new power plants and so we're.
Really seeing kind of a direct outcome of the themes west has been talking about globally focused on the specific.
Issues into Brazil, and look forward to updating everyone more as we make progress with these new power plants right. Thanks Andrea.
Stock for a minute about LNG and let's start with my favorite cartoon on page 14, So just as a reminder for people.
What is fast LNG, it's just basically using existing marine infrastructure to place Lithification, our liquefaction materials onto it.
Why do this because it's a faster and be cheaper so.
Half as much.
Time half as much capital and with as I said, we went.
And as LNG, one and with long lead items and that's under construction right now and the punch line is on time and on budget expected to be mechanically complete.
In the middle of next year, and then allowing for three or four months for commissioning, we think we're ready to deploy that at the end of the year.
If you look at the.
The business opportunities on page 15, they fall into one of two different camps basically we can take this year and we can deploy it for others and charge them rent for it. So that's essentially what we have with the Healy, which we owned 50% us that's a tolling a relationship where we be.
<unk> own and operate.
Collect rent from.
Credit quality tenants produces stable and long term cash flows great utilization of the IP. The significant IP that we have here from the technical side to basically create this on behalf of others.
Second path is to basically do it for ourselves. So again, we build own and operate we own the volumes less predictable cash flows, but the risk is greatly mitigated by the terminals in the downstream operations that we have and it has the potential to generate significant windfalls. So if you just flip to page number 16.
On the tolling side, we have a.
Use case in the form of the Healy because this is a very good example for what.
What the economics of this looks like so this is a ship that costs $1 $2 billion to build its $2 4 million tons. Four trains 40 months of total construction time economics basically are.
Right around $3 25 and <unk>.
Btu and then they get paid another five cents.
For every $1 that Brent is higher than $60 a barrel.
Simply.
In today's market that would generate about $250 million to $300 million and capacity payments for this this installation are fast LNG equivalent is obviously our cost is lower over $1 2 million tons versus $2 49 times. It takes us 18 months to build it.
And.
Because the demand for LNG is so high right now when you look at the market today in the market for it over the next several years. The next several years are very very valuable years. As a result people are willing to pay more in rent to get access to that so even though you don't have market exposure on the tolling side.
Cause people can benefit from having higher volumes in these in these elevated markets, they're willing to pay more for rent that's the simple economic profile of it. So in this case again the two.
<unk> hundred $75 million to $300 million in capacity payments using similar illustrative.
<unk> charges, you can see that while it's not merchant volumes, it's a very very attractive proposition just simply be providing for others.
The page number 17, so the merchant potential obviously is extraordinary and while we did simply as I. Just took a 2 million ton example ran it out by month from 2000, 22021 and compared what the.
Cost of LNG or $4.50, which is rough justice for what we think the all in cost of the of the product is and then look at the different indices and just then trying to annualize and show you what the impact would be if you had those volumes to sell into the marketplace at those points in time. So if you look at the yellow box at the bottom you can see 2021.
These are these are monthly numbers, so the $170 million $274 million $601 million were obviously significant you flip into 2000 and later in 2021 and 2022 and the numbers obviously go off the hook.
So and.
The key to this.
The the phrase of the day is asymmetrical exposure.
In a market environment. This is the Holy Grail of what Youre trying to do is get asymmetrical exposure to commodity and so which means in simple terms you have very limited downside and you have extraordinary upside.
The very limited downside exist because we have this very large and very robust.
Set of terminals and assets around the world. So we can access those markets and sell our products.
Directly to customers in those markets and thus reduce our exposure to markets, while still maintaining kind of the market exposure to the extent that things do better when you look at these numbers.
It ranges from a good outcome to an extraordinary outcome, which could generate four just this 2 million ton example, two to 3 million.
And marginal EBITDA on an annual basis. So it's an extraordinary market and this is this is the right way to do it page 18, you look at this collection of the assets that we've got.
As I said before we've invested roughly $8 billion and seven years of our lives building. These assets around the world will continue to add selectively to them, but we are already having a very very robust fleet of it. So this is this is literally the seven year overnight sensation of being able to actually create all this demand downstream and access.
And thus this combination of tolling revenues, which is really infrastructure returns very high infrastructure returns, but appropriately so plus merchant returns. We think is a very very powerful combination.
So with that let's just talk briefly about an energy transition and I'll turn it over to Chris but the.
Page 20.
The Pie chart on the left hand side is what we looked at we focused on our activities. So 75% of all greenhouse emissions come from three sectors. So industry power transport in particular.
Full de carbonization of these will not happen overnight and electrification alone cannot support decarbonize the economy, but the large consumers of fuel for heat and power need a low carbon alternative we believe I believe that blue hydrogen or.
Its cousin Blue ammonia is the affordable low carbon solution, we get asked all the time about blue hydrogen versus green hydrogen green hydrogen obviously, it's made from renewable power blue hydrogen is made by simply taking natural gas and splitting it out into the.
The hydrogen and then the <unk> is densely clustered so it becomes effectively clean through the sequestration process. Obviously, everybody is rooting for a green green.
Hydrogen alternative, but it's just simply a matter of cost at this point, we believe that we can generate blue hydrogen at roughly a dollar a kilogram.
Convert that into natural gas terms, you just multiply by seven and a half so $1 times seven five is obviously $7 50.
It's a very very competitive as a fuel for lots of industrial uses as well as transportation the.
The green hydrogen alternatives at this point are 3456 times as expensive.
And while some people can afford to pay that most people cannot so it's a luxury good as opposed to a staple that people have.
What we have done is we've made significant process with our partners.
At <unk> on the infrastructure fund we are nearing the.
And our first blue ammonia.
<unk> production facility.
As a facility that has the three principal food groups that you need and so it's got access to natural gas and ample terms. It's got a C. O two pipeline, which is next door. It allows you to inject into it and it's got water for transports you can then take it away from you one or the other.
Aspects of the site that we're looking at is it's also within a port.
Terminal situation, where we can access potentially low cost taxes and financing and so when the when we finally get to <unk>.
Obviously get back on the phone with you all and walk you through the economics of it we think there could be a very very attractive financial.
Profile of this as well given the access to the financing we expect to be permanent and have your EPC contract in hand, we get to the finish.
Completed by the end of Q1, 2022, and then it would be online and operational 20 to 24 months after it.
Page 22, 22, obviously theres a lot of discussion about congressional efforts on their build back better Act.
We are.
Obviously following this closely when you look at that act.
<unk> focus on what it means for.
Hydrogen production. The answer is $15 billion that is awarded for hydrogen production carbon capture emission reductions are projects, there's been a whole host of different ASP.
Aspects of it that we think are all relevant in.
And actionable within our portfolio. So this we think is the right move by the government I said before I think the U S government can play a major a major role in the transition.
Energy economy, and we are very well positioned to be a beneficiary of that is obviously the efforts that we've taken underway are only enhanced by.
These kind of programs.
The plan forward very very simple on page 23 build this proof of concept hydrogen plant.
Utilize our existing downstream infrastructure for both transport and distribution and then helped to transition that heavy polluter industries shipping cement and steel are probably the three most likely.
Focuses for us.
The near term.
Yes, Thanks Ross.
Good morning, everybody and thank you for your time I wanted to start today with a comment on the amazing work that these employees are accomplishing in partnership with our customers and if he is now over 800 employees strong and they work every day to lower energy costs and Decarbonize the communities in which we operate it's a privilege to work alongside these individuals who make our fight against energy poverty.
Possible and Thats as a result of these employees the graph on slide 25 shows our hyperbolic growth over the last several quarters and a little over five years and if he has gone from a small development company to a world leader in energy infrastructure business. In fact, if you go back to the initial operations online date of our liquid fire in Miami It took us 18 quarters.
To get to positive operating margin yet in the last year, we transitioned over 1 billion in annualized annualized margin further as this slide details at the time of our IPO in early 2019, we had negative margin in a fraction of our current employees our infrastructure footprint print is no less impressive in 2019, we had only 11 customers.
Those three assets in two countries today, we have well over 50 customers across 20 assets in 12 different geographies.
All sides of the sides of the globe.
Our earnings profile is large extremely diverse and continues to expand everyday to become increasingly stable predictable and heavily growth oriented.
This page we highlight the financial performance for <unk>, 'twenty, 'twenty, one, which will be nearly $1 2 billion of annualized operating margin and as Wes said earlier, we are forecasting $375 million for Q4 of which 98% of those cash flows come from contracts already executed and nominations received from <unk>.
Yes.
Now turning our attention to slide 26, and the financial results for Q3, we sold an average of just under $1 8 million gallons per day for the quarter and earned revenue of $305 million the terminals and infrastructure segment operating margin was $116 million per quarter, three which is over double any previous quarter in our history.
$20 million increase in our ship segment operating margin to $95 million as a result of the full quarter's results being included.
But it was also the beneficiary of elevated spot market charter rates for the Celsius and the Penguin.
One thing we wanted to highlight here is the consistent and expected cost of LNG during a quarter that saw spot LNG prices range from 10 to $30 per M and Btu and if these sourced LNG and an average versus purchase price of $7 10.
Another important thing I wanted to remind everyone of is the fact that all of our customer contracts online in Q3 and over 80% of our contracts that run rate the underlying commodity is a pure pass through so we buy at Henry hub, plus and we sell at Henry hub, plus which provides the foundation of our high margin net spread business.
SG&A for Q3 for the core non growth business was approximately $20 million, excluding costs incurred to develop new projects and other nonrecurring noncash items.
A quick comment about the balance sheet as we included on the page NFC has over $330 million of cash on hand at September 30, and nearly $700 million of availability on our revolver are shipped facility <unk> financing.
Finally, please turn to page 27, you can see the punch line, which is the NFL has real but is it robust cash flow machine. We are committed to our goal of becoming an investment grade company and we are well on our way to achieving investment grade metrics. We've dramatically increased the scale of the business going from three to 11 terminals across 12 different geographies we are.
Diversified our cash flows which include volumetric gas and electricity revenues capacity payments shipping cargo sales et cetera, and have expanded earnings to over $1 billion and operating margin.
We're honored on target for three times debt leverage coverage ratios and lastly, we have de risked the business model by controlling our own shipping costs as a result of the GM LP and hydro mergers and will further vertically integrate by producing our own LNG as we continue our credit enhancement initiatives and get upgraded we can free up over <unk>.
$200 million of annual cash flow through simplifying and refinancing our capital structure. We expect we can refinance our $2 $75 billion of high yield notes at rates, approximately 300 basis points lower than current borrowing and reduce interest expense by roughly $80 million a year. Furthermore, over time, we can refinance $1 billion of asset level debt.
Removes over $120 million of annual amortization.
Unlocking these additional cash flows as the next key step in maximizing our cash flow available for reinvestment or for dividends with that I'll turn the call back over to well, yes, just before we go to questions. If you flip back in the appendix page.
Pages 29 through 32 credit investors on the phone. These pages are for your I mean, basically it's just a continuation of what Chris just laid out.
When we.
Our first corporate bond issuance, which was in July of 2020, So only 15 or 16 months ago. It seems like 15 or 16 years ago. There's been a lot that's happened in that period, but at that time, we spend time with the agencies and.
Our case for what we thought the credit worthiness of our business.
The obviously agreed to an extent, which is why we got the highest single B rating. They said basically the three pillars that we needed to address to kind of justify a better rating.
The ones that we show on page 29, and they are simply more earnings.
More diversity and more operational history and in a short period of time, we've made a remarkable amount of progress in all three of those so it.
At the time of the initial rating our operating margin was $200 million operating margin for the second half of this year of $585 million to $1 1 billion.
This year, so obviously have had tremendous growth in earnings.
From a diversification standpoint at the time of the rating we had three terminals 37 customers two geographies today, we have 11 terminals over 100 customers in 11 different geographies. So massive massive change in the diversified footprint of our business.
Operationally at the time that we did.
The initial bond transaction, we had known ships and we had 300 employees and limited operational experience today, we have over 800 employees.
Very robust ship portfolio.
Portfolio that is not only relevant to providing us.
The ability to service our customers and our terminals, but also then to access the merchant markets as we've done here in the last few months. So this is a nuance, but without that ship expertise.
The operational capabilities of that group, we would not have had the same success that we've had over the last couple of months. So really across this scorecard across the board massive changes each one of them and each of the next couple of pages then details that so the run rate earnings we talked about before on page 30 page 31.
The diversification is extraordinarily both by geographies and number of customers.
Revenues from the ship portfolio.
850 ship to ship transfers versus 650 a.
A year and a half ago invested capital of $675 million to over $7 billion. Today. So obviously a huge change in terms of the diversification of it and then the operating history.
Which is very very hard earned so initial rating we had done 6000, ISO container loadings, we've roughly double that over this period of time 650 ship operations is now 840, most ship to ship operations.
Operations, we believe of any company in the hemisphere.
300 voice over.
800, and reliability of 98% going to 99%.
Think we deserve high marks on the credit side as well and hopefully that will just that will that will relate to lower borrowing costs and higher credit ratings as Chris said before.
So with that let's open it up to questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Stand by while we compile the Q&A roster.
Yes.
Our first question comes from Spiro <unk> Credit Suisse. Please go ahead.
Thanks, operator, good morning, everybody.
First question for me just a two parter on on fast LNG.
Based on some of the fine tuning of the strategy. We're hearing this morning, it seems like you're nearing a commercial agreement there. So first I'm just curious what if you've narrowed down to counterparty and a location I understand you can't disclose that at this point, but just curious how close you are in the second part of the question just want to make sure I understand how youre thinking about fast LNG now has it become more of a natural hedge.
On the business first and a direct supplier to the terminals and so in a low price environment, you supply the terminals and an asymmetric upside scenario you sell to the highest bidder and effectively subsidize any losses elsewhere just to understand the mechanics.
Yes.
Great well.
The answer the first question is we are having very robust discussions with several counterparties.
That has a significant gas reserves and are looking to monetize them. So.
The profile of both of them are similar they're very high credit quality very large oil and gas companies.
Obviously they have.
And understanding of the markets and what the market dynamics are and the availability of our <unk>.
<unk>.
In the near term is one that is very attracted to that I mean, it's not an overstatement to say that we are.
Not only possible, but likely to be the only people on planet Earth that has spec developed a liquefy or that's a risk that we have taken on I think the automaton inside that risk is likely to pay off handsomely as we now have an asset that fits their profile. So we are not.
Don on the Seattle would be we'd be talking about that but I think there's a good chance we have prospects on a number of different fronts on the tolling side and we think that that is a natural extension of the business is really very much along the lines of the Healy. So thats been a good education for us and the tolling market given market.
Dynamics has improved as well because again the value of the product youre, creating as theres more valuable. So therefore, it's just better.
On the merchant side of it.
I think it is.
It is very very clear what the path of it is is that.
If you can create merchant volumes at a low absolute price and you know that you have the backstop of accessing these high volume markets. So that to the extent that the market opportunity is a modest one you can always you can always just utilize your terminals and provide.
Gas into the market's at competitive prices you have very very limited downside and.
And to the extent that there are spikes in prices as we experience now you have massive asymmetrical upside and that's basically the business I think that the probably the more.
More nuanced answer to that as well as Spiro has that having access to our own gas only enhances our ability to service, our customers better and better and better at the end of the day, we know that the best use for all of our products is to service customers' needs for both gas and power and having gas allows us to be much more flexible in order to.
To do so.
I think that.
The point I'd make about market commentary I think the world generally was very offside too complacent about the availability of gas in any market.
And what happened obviously is that people under committed on their volumes thinking that they could always go into the marketplace and replace that we've seen this with many of our of our own customers and obviously, we provide a 100% of what we are contractually obligated to do but when the market price changes dramatically their access to gas or their <unk>.
Access to gas it inexpensive levels is very very constrained and so not only do you see individual customers get offside, but we saw whole countries get outside and that's where we are right now and when you get this confluence of events of <unk>.
Climate change related things, which is again less rain in Brazil, too much rain in China, not enough wind in Europe, and a throw in other things like just simply higher economic growth and perhaps less gas coming out of Russia is a very very very.
Explosive combination that's why you saw gas prices go from two years ago was Lowe's.
85 two.
Transactions in the recent month of 30 to $35 $40. So it's an extraordinary environment and so we think being positioned to have very limited downside and have asymmetrical upside is massive.
A massive thing.
I would say in this in this business the three most important elements and value in any business are sustainable competitive advantage, we've got a $7 billion to $8 billion downstream portfolio. We soon will add to that merchant capabilities on the LNG side and our customer business. We think that that is a massive sustainable competitive advantage to give us both stable cash flows and the.
And the normal markets and asymmetrical cash flows and the very bottom lines.
Got it that's helpful.
Helpful color.
Second question, just switching gears to blow ammonia.
So you're getting pretty close to sanctioning that and so I know at one point.
Zero parks was supposed to be spun out and I think incubate that asset and so I'm just curious if we get an update on where that's been out potentially is as we think about funding the capex for ammonia.
Or I guess, which entity is going to sort of shoulder that and if you can give us a rough sense on how to think about that.
Yes, it's going to have a modest amount of cash flow, we think as I said.
I think that we haven't made a final determination for how exactly we will capitalize it but I think in simple terms the <unk>.
The facility that we're looking at initially is roughly $400 million.
We're doing that in partnership with.
With the FTA guys can Nicholson is sitting in the room with US now maybe can give a little bit of color on this but I think we expect to be able to finance.
The lion's share of that capital with tax exempt financing. So that's one of the secret weapons of these financings are terminal financings that we've gotten we've got some pretty good examples of that but that's how we think about it in terms of that company existing either inside of NFC or spun out that's something obviously that the board.
And management needs to spend some serious time on I do think that over time.
The opportunities in the hydrogen and transition energy space are so vast that having a separate identity for it makes sense, but so I don't think it is ultimately a question of if it should have its own separate identity, but really one more of win and should do so.
Can you give some thoughts and yes, I would just say spirit financing point as Wes said, we have had a lot of success at F tie with tax exempt financings you can get pretty high leverage at very very low rates, it's been a particularly strong market with.
The new the new tax.
Spending policies that are coming out of the federal government. So there's a fair amount of demand for tax exempt securities. We did a big tax exempt financing at our Jefferson terminal tie over the summer average rates they're unrated.
<unk>, 2%.
For this particular project most of the expenses and construction costs are eligible for tax exempt financing. So for a $400 million facility, we should be able to get somewhere between 303 hundred $50 million of debt financing against it.
Got it that's helpful color guys. Thanks for the time.
Thank you.
Our next question comes to Sam Margolin of Wolfe Research. Please go ahead.
Good morning, everybody, thanks for calling on me.
Thanks for the detail on Brazil, and the auction pretty robust price realization there.
Can you just talk a little bit about maybe the business model and in Santa Catarina against that power backdrop is it going to be sort of a fixed fee.
Terminal business or do you envision yourself, taking some.
Variable cost economics there.
Against the against the power capacity.
Yes. Thanks for the question, we think it's a great outcome on the power auction and really the right thing for the region and the power shortages. So I think the business will look a lot like our other terminals.
We will have it.
Central Catarina all sources of downstream demand so power industrial.
Even consumer and residential and then what we think can be a very kind of robust off grid or small scale, so container business as well.
We don't think about it is.
As.
Any sort of different model I think youre mentioning almost like a fixed fee model or anything but we.
We would expect to supply gas to our customers.
Our terminals just like we do everywhere else and.
The dynamics of the region, our access to the pipeline.
And kind of the overall macro backdrop makes it together in a really interesting project for us.
Okay. Thanks for that and then just a follow up I think this is for Chris.
We've had an inflection here in operating margin and I think the next phase of the evolution is sort of converting operating margin to cash.
And so recognizing there's a lot of volatility in the underlying commodity in <unk>, there's going to be working capital.
Variance, but can you just help us think about maybe in 2022.
<unk>.
Some of these recent terminal scale, how we should think about operating margin sort of flowing to cash flow.
Sitting on a high level, it's a robust cash flow business, but maybe some of the mechanics. There on a go forward basis.
Yes, I mean so.
Holding aside.
There's like moving and work moving working capital, which happens now as things are turning on and you have more LNG. That's been purchased and is being sold for varying points in time.
When you think about op margin is reduce it by SG&A.
<unk> it by your interest expense and reduced it by your tax expense and truthfully, we think that if you take $1 billion to growing to over $1 billion five in op margin by the end of next year reduce that by.
$100 million, hopefully thats going down on the cost to kind of run the core business.
Reduce it by current interest expense, which is about it call interest plus amortization, Sam $3 to $400 million.
We obviously want to reduce or eliminate and more through refinancings as I mentioned.
But the goal would be to take by the end of next year of $1 5 million run rate down by SG&A down by interest expense and amortization, leaving you close to $1 billion available for reinvestment that'll be taxed and taxed at varying rates across the business and happy to work with you offline on tax through the model.
I think you can definitely see your way to close to $1 billion of cash to the balance sheet annually.
Okay. Thanks, so much I appreciate it.
Thank you.
Our next question comes through Sean Morgan of Evercore. Please go ahead.
Hey, guys. Thanks for taking my questions.
So just going back to the Brazil power auction, so I'm trying to understand the mechanics of that those contracts a little bit that 14 per kilowatt hour.
Translate.
I guess on a revenue and a gross margin perspective for MN Btu that kind of I guess sort of fit with the existing guidance we have for the models.
Yes, I don't think were ready to disclose the kind of those details yet, but I'll give you a little bit on how the power option works. So.
New power producers did both for a energy price so like a cents per kilowatt hour price and they also get a fixed capacity payment.
And so what were trying to message here is that given the kind of need for return on capital over the 44 month period of the Ppas.
And sort of Brazil strong incentive to incentivize new power generation.
These prices cleared at high levels on the power side and I think that's the kind of the point of our message here and we can show some of that breakdown and as we get into that business, we'd be able to show kind of more granularity on how we fit into it but I think.
For now our message, we're just trying to show that obviously there is.
Auction that clears at a very high price, which as you know.
Recognizing the very high need for new power in the region.
In simple terms the cost of electricity and responsiveness emergency auction was roughly double what the long term cost was previously so that's a very direct like what happened to the consumers would have in the market. They needed power. There was a lack of hydro electric power and so they ran an auction and competitively.
Cleared at roughly two <unk>, what it was before so.
Obviously, we're working hard to support.
And those people that want to provide the power and by doing so we will do so with.
With our volumes, but our margins will be obviously.
Higher than they would have been.
Previous to the market move so we don't as Andrew said, we don't really break out margins by asset or a terminal or unusual transaction I don't think that that's a that's a productive path.
Okay. So just to follow up though on the structure of that is it going to look like <unk> fastest batch backup power for hydro or will it be base load power now.
I would be doing a consistent.
The amount of volumes every quarter after the facilities come online.
Yes.
Thanks for the question because thats actually mostly public information on the auction it's base load power. So most of the plants declared our 100% base load a couple or a little bit less than that but.
It's totally different than <unk>.
Okay.
And then just really quickly on the.
On the up Lng's.
Will those facilities be either or merchant or tolling.
You bring on a new project that will be either tolling or merchant or could they be mixed use.
The LNG projects.
They definitely could be mixed use I think that right now we are down.
A path, where we're talking to people about a tolling arrangement.
Arrangement, where they just use the.
The infrastructure to access their own.
Gas assets.
We're also then looking at situations, where we could buy gas and generate ourselves. So right now they really are and one of the two camps, but it's entirely conceivable that we would do.
Some kind of transaction, where we would both be the tolling provider and also then take some of the other volumes, but right now they are there in one camp or the other but theres no reason why that couldnt be combined.
Great. Thanks Weston Andrew.
Thank you.
Our next question comes from Greg Lewis of <unk>. Please go ahead.
Hi, Ian Thank you Ed and good morning, everybody.
I guess I was hoping you could kind of parse through the sequential.
Margin increase.
Is there any kind of way to think about Q3 margin growth versus Q2 in terms of how much of that was driven by shifting and maybe how much of that was due.
Driven by whether you want to call it merchant power or other.
Well.
Sure.
At the end of the day at the volumes that we sell are to customers, where the customers that are buying bulk clients or customers that are buying long term for us and so we don't really breakout differentiate between those we gave I think pretty clear guidance on what we expect our margins to be in the ordinary course, and so when you look at.
2022 estimates of $1 1 billion those are very much in the ordinary course and are not really looking at kind of asymmetrical market changes.
As we get access to volumes and that's where the LNG is so important those numbers could change dramatically, but what I would say is that.
And I mentioned this right at the beginning I think that the remarkable aspect of the results that we have.
Is that we did this in a market environment, where we went into it actually modestly short in terms of short term supply and so we didn't take some.
Market directional bet that actually paid off.
That sounds great, but it's very hard to outperform the market for an extended period of time, we had a very market neutral position to one that was modestly short in the short term.
And that resulted in us actually generating substantial returns because the the flexibility that's afforded by the infrastructure that we have is remarkably valuable and the numbers are the numbers, but I think that.
Again, we don't we don't break out margin by individual customer or a terminal we don't think that that's a.
That's a productive way of doing it at all but the results speak for themselves. We went into a market, where we didn't have a mark a directional bet on and are going to make $585 million in the second half of the year right. So.
And have given really clear.
Guidance as to what we expect to happen year next year and the year after.
That are absent any kind of asymmetrical really returns.
Okay, Okay, and then as I think about the merchant power opportunity clearly.
In Brazil, well water linear probably means more low water is there any and I guess you gave Q4 guidance is there any way to kind of think about the lead times for the merchant power opportunities I E.
Should we be thinking that as we think about maybe what Q1 could look like.
You continually getting updates because the lead times on those are a couple of months is that kind of the way to think about.
Key thing and elsewhere.
Yes.
Yes, I think theres kind of two types of opportunities there right. So I think it's something like a GP.
Where are you kind of have exposure to the power market, we were able to capitalize on things as they happen in kind of day to day power market and then we have opportunities that I think are going to look more like the emergency power auction. We're talking about today, where you kind of have a little bit longer term procurement cycle, but in this case actually pretty fast from.
I'm going to kind of zero to built on new power plants, and so I think we'll see the sort of regulatory mechanism work in both ways.
And the point for US I think it just being situated to capitalize on those opportunities as they happen as well as opportunities outside of power that we're going to see coming.
As we are really feeling the shortages of kind of energy broadly and we feel like our terminals, there, obviously, well positioned sort of geographically and in markets and with customers too.
Take advantage of those.
Okay Alright.
Everybody. Thank you for the time.
Thank you. Our next question comes from Craig <unk> of <unk>.
Please go ahead.
Good morning, Thanks for fitting me in.
On the two N tpa.
Ample for merchant.
Hum.
Two questions.
The 1.2 on PPA.
Project kind of build a cookie cutter and are we thinking that maybe by the end of next year, we could have.
Three total projects either.
Operating or well.
Yes.
The answer to the first question is yes, it is actually the.
The dimensions of the.
Infrastructure is actually one 4 million tons, we've kind of rounded it down obviously the actual production is in part a function of.
The weather conditions, and obviously, it's warmer you're a little bit less efficient in terms of that but the 1.2 is related to the one four so 1.4 as the actual technical specifications of the year and want to guess on the 2 million tons. We did just simply rounded Craig we think.
All of these numbers assume.
One or two deployments and we think that there may be.
Many many more than that and really what we are working very hard to create as a factory like environment for the production of our infrastructure that allows US then to service both customer needs until one side and a merchant needs of our portfolio.
And I think that.
Again, the the dimensions of the business are one where you have one.
$1 billion going to 1 billion and a half or more on the business in the ordinary course, and the potential to have extraordinary returns.
If these 100 year floods continues to crop up on an annual basis, which is what we think I mean, I guess my last.
Thought on it would be when I look at the valuation of the company I think we are very very undervalued as a value stock right. So we're trading at <unk>.
Single digit number based on actual earnings which is a value stock metrics and for an infrastructure business that is typically trades at two or three times that it seems like we're very very undervalued from it from a value stock and we're a growth company. We have had massive massive growth. The actual the number of companies on planet Earth that started business is it.
Company 17 quarters ago that are going to generate $1 billion in cash flow is a pretty limited number and that is just the beginning of it. So I feel like valuation we've got a long ways to go we got asymmetrical exposure to probably the most significant.
Energy related market in the world.
And the energy transition, which we have been.
Were an early adopter of that's been a focus of ours from day, one and we think we're at.
The one yard line in terms of having investable product too.
To take advantage of that so.
I do think that overtime.
Water finds its own level, and we will get valued appropriately, but I do think it is a massive.
Point of inflection for the company and hopefully the valuation starts to reflect that.
Thanks Wes.
Quick follow up could you opine on the ability of floaters versus just Jack ups to materially expand the potential opportunity set here.
There's a lot of ships that are available.
One of the things that led us to this solution was that there's an abundance of.
Drill rigs that can be repurposed theres also the deepwater ships, the savant ships, which will work in the deepwater installations. There is an abundance of those available as well and we think both I mean, where you're really looking for at the end of the day is roughly 100000 square feet of deck space to basically put your modules onto and so on.
There is a there is a much more technical solution to that in terms of the weight and bearing distribution and whatnot is where were looking for but you're really looking to be able to clear 100000 square feet of deck space through one or more.
Products and with that that's a pretty broad swath of infrastructure that's available for for both shallow and deepwater installations.
Thanks Ian.
Thank you I would now like to turn the call back to Wes Edens.
A final remark.
Terrific. Thanks, operator, thanks, everybody for calling in and obviously, a terrific quarter and a lot of information, but the path for us is getting clearer by the day and we're happy to have a chance to share with you. Thanks very much.
This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
Okay.
[music].
[music].
[music].
[music].